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The Ultimate Rule Maker: Nike

In the world of sports, the ultimate rule maker is Tiger Woods. Arnold Palmer recently said of Tiger, "He is so good, and he is, right now, just my opinion, out there by himself." But as an investor, I'm more interested in Tiger's primary sponsor, Nike (NYSE: NKE) , which is out there by itself in the world of athletic apparel and footwear. As you'll see, Nike has all the qualities of the ultimate Rule Maker.

Brand as completive advantageAs Nike and Canon endorser Andre Agassi once said, "Image is everything." At the time, he was wearing a huge mullet, but he had a point, at least in terms of selling apparel and footwear. For Nike, image and brand have proved to be a sustainable competitive advantage. According to a study by InterBrand published in BusinessWeek, Nike's brand is worth $10.9 billion. That makes it the world's 31st most valuable brand, and the second only to LVMH Moet Hennessy's Louis Vitton among apparel and footwear brands. Adidas ranked 71st, with a value of $4.3 billion, and Puma didn't make the top 100.

Admittedly, creating a super brand is expensive. In the last quarter alone, Nike spent $480 million on advertising and promotion, and the company has committed over $2 billion to endorsers between now and 2011. While that is a huge expense, I'd argue it is a smart and necessary investment. Nike's elite endorsers -- Tiger Woods, LeBron James, Michael Jordan, Ronaldinho, Maria Sharapova, and Lance Armstrong -- lend instant credibility to the Nike brand.

Innovative productsNike has a history of designing and creating innovative products. It started in the 1970s, when the company was known as Blue Ribbon Sports, and Oregon track coach Bill Bowerman created rubber waffle shoes for Steve Prefontaine. Later, the company revolutionized the world of running shoes with Nike Air technology, and most recently, Nike has partnered with Apple (Nasdaq: AAPL) to create Nike + iPod running shoes, which include a chip that sends time and distance information to iPods.

Broad consumer appealNike offers something for everyone. The flagship Nike brand includes high-end footwear, apparel, and equipment offerings for men and women in basketball, running, golf, soccer, outdoors, and general fitness. Nike's other brands extend the range. Converse and Starter offer athletic shoes and apparel for similar markets, but at a lower price points. Bauer is focused on hockey apparel and equipment, and Cole Hann offers dress shoes and clothes. Hurley caters to surfers and wannabe-surfers.

Healthy balance sheetNike has $1.91 billion in cash and only $473 million in debt. By comparison, Adidas has only $400 million in cash compared with $3.4 billion in debt. But Nike isn't just hoarding cash; it's also paying shareholders. In the first two quarters of fiscal 2007, Nike repurchased 7.5 million shares at a cost of $603 million. The quarterly dividend was recently increased to $0.37 per share.

According to management, this growth will come primarily from the Nike brand through new retail stores and international expansion. Nike plans to open 100 new retail stores over the next three years. The strategy is that these stores, in premium locations, will drive revenue as well as brand awareness. My view is that opening 100 retail stores will provide only a small uplift relative to Nike's current revenue of $15 billion. However, Apple, Ralph Lauren (NYSE: RL) , and Coach have been successful with this strategy.

I'm more excited about international expansion. The Nike brand currently derives 61% of sales from four countries, the United States, the United Kingdom, Japan, and China, which represents less than 28% percent of the world's population. That tells me Nike has plenty of room to grow. I'm particularly excited about the so-called emerging markets in BRIC (Brazil, Russia, India, and China). Last quarter, Nike sales grew by 30% in China, and CEO Mark Partner has described Russia, Brazil, and India as potential new billion-dollar markets.

ConclusionIf you're scouring the markets for a blue-chip, Rule-Making company that you can buy and hold, Nike should be considered. It has a great brand, innovative products, consumer appeal, financial stability, and sales growth.

Fool contributor Brendan Mathews welcomes your feedback, and he admits there is room for debate over the world's most dominant athlete (Tiger Woods or Roger Federer). Currently, he is ranked 2,522 out of 23,713 investors in the Motley Fool CAPS system. He owns shares in Nike. The Motley Fool's disclosure policy picks Federer any day of the week and twice on Tuesdays.

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A Fool since 2005, Brendan is a research analyst on The Motley Fool's Stock Advisor newsletter. He enjoys scouring financial statements, pontificating on competitive advantage, and any outdoor activity. Follow @TMFWillSommers